Don't dump PPF

There are reports that the government might be considering doing away with the popular Public Provident Fund (PPF) scheme. This thought follows the ordinance setting up a pension regulator.

The logic apparently is that since one can exist only at the expense of the other, and since the new pension arrangements need to be given a push, it is the PPF that must go.

This view is born out of the notion that most people use the PPF as a way of ensuring a steady post-retirement income. But there is more than one way of skinning the cat.

The primary problem with the fund is that it offers higher-than-market interest rates, and this could undoubtedly be one reason for its popularity. The current rate of interest is a tax-free 8 per cent.

In addition, it offers tax benefits under Section 88 of the Income Tax Act, which mean deposits up to a specified limit are reduced from the tax payable. Finally, of course, there is the government guarantee.

The Fund is regarded as being absolutely safe, not least because a PPF deposit cannot be attached under any order or decree of court. All in all, it has proved to be a great scheme for mobilising savings from people who are not very rich and who are looking for safety.

There is, of course, an initial lock-in period of 15 years, which is extendable in blocks of five years, but this is generally accepted because the fund is meant to be a vehicle for long-term savings.

Assuming for a moment that a savings instrument that is out of line with the market should not be persisted with, could there be more than one solution? After all, the scheme is easily accessible (through banks and post offices) and convenient, and millions use it as a prime vehicle for long-term savings.

So there is a case for not throwing the baby out with the bathwater, especially when some simple modifications would be a better way of achieving the same results.

The first corrective would be to bring the PPF under the new pension regulator, who, if he/she is doing the job properly, ought to be able to minimise any political influence on the decisions that the fund takes""like determining the applicable rate of interest.

The tax exemptions can and should go, in the spirit of doing away with all or most tax exemptions. And as for the rate of interest, the regulator can easily issue an edict that it will not be guaranteed by the government and will be market-determined.

These changes may reduce the fund's attractiveness, but since it is something that works well and is popular and generally helpful to everyone, there is a good case for smoothening out the wrinkles rather than discarding the whole thing.